Manitoba Should Consider An HST

Manitoba has a reputation as a diversified and steady long-term economic performer. Indeed, in 2009, Manitoba alone among Canada’s provincial economies did not contract.

According to the Conference Board, real GDP growth in Manitoba for 2011 will be 2.3 per cent placing it fifth highest amongst Canada’s provinces.

This strong performance is evidenced by still robust housing investment and provincial unemployment rates that are below the national average. Even recent population growth has been strong by historic standards as the result of in-migration. With a strong agricultural sector and growing world demand for food, Manitoba seems well placed for future prosperity.

Yet there is the nagging feeling that all is not right and Manitoba demonstrates some economic weaknesses.

Though a part of Western Canada, Manitoba’s economy has not grown as fast as Saskatchewan’s or Alberta’s and its projected GDP growth in 2011 and 2012 will also trail those provinces. If one compares Manitoba to its southern prairie neighbor, North Dakota, it is also Manitoba that has the higher unemployment rates and the lower real GDP growth. Manitoba’s economic performance only looks stellar when it’s compared with Atlantic Canada or northwestern Ontario.

Of course, Alberta and Saskatchewan are fuelled by the equivalent of economic steroids — natural resource rents from oil, gas and potash. But Manitoba also has natural resources — agricultural land and, more importantly, abundant hydroelectric resources.

Yet Manitoba seems to have not benefited as much from its natural resource base, given that electric power sales overall have declined in the last five years.

As for Manitoba’s diversified and stable economy, the fact is that its celebrated manufacturing sector has also been slowly declining as a share of the province’s economy over the last decade. The high value of the Canadian dollar and the impact of the recession in the United States, which takes about two-thirds of Manitoba’s exports, have both played a role in manufacturing decline.

Another indicator worth noting is that Manitoba still gets one third of its provincial government revenues from federal transfer payments, much of that from equalization.

Equalization accounted for $2 billion last year, making up about half of all transfer revenue and about 17 per cent of total revenue. Given that equalization is paid to provinces with below average fiscal capacity, it means that Manitoba — despite its diversified economy and "robust" growth, is still relatively weak economically.

As an equalization recipient, Manitoba is definitely a part of the East rather than the West as P.E.I., New Brunswick, Nova Scotia, Quebec and Ontario are the other recipients.

Aside from current strategies of investing in education and pursuing business tax relief, what else can Manitoba do to boost its long-term economic growth rate and competitiveness?

First, while its export markets are more diversified than other Canadian provinces, Manitoba needs to broaden its markets even more. Export opportunities in rapidly growing China, India and Brazil need to be explored more aggressively.

A benefit from the recent surge in international migration to Manitoba will be a host of instant trade ambassadors and contacts with other countries. The biggest sources of Manitoba’s recent international immigrants — Philippines, Germany, China and India — are also where future export and import business opportunities lie.

Second, because of its beneficial effects for exporters, it may be time to revisit the controversial HST issue. Harmonizing the retail tax system with the GST can provide a competitive boost for industry and business by allowing them to claim taxes paid along the supply chain as credits against their tax liabilities.

Moreover, the HST reduces the administrative costs of complying with two tax systems. While this does entail a shift of the sales tax burden from business to consumers, the burden on lower income groups can be mitigated by a more generous provincial tax credit.

The benefits of the HST on the export sector and the economy are long-term, but in politics timing is everything.

Ontario implementing the HST at the height of an economic downturn was not terribly prudent. It was a calculated risk motivated by the looming fixed provincial election date in 2011. Burying the transitional impacts of the HST alongside the recession would hopefully allow it to reap the long-term economic benefits in time for the election while leaving consumer anger in the past. The wisdom of this strategy remains to be seen.

With the recession ending, Manitoba is fortunate to have the flexibility to reconsider implementing the HST during a time of economic recovery.